The COVID-19 pandemic is now everywhere, moving more rapidly than most in North America imagined. Who knows where it’s all headed? Large gatherings are cancelled and workers are encouraged to stay home, some in self-quarantine.
It’s not so simple for workers in assembly plants to stay home, however, and nor for salespeople and technicians at auto dealerships. If those hands-on people want to continue to make money, despite government assurances of financial assistance, they have to be there on the shop floor, masks and sanitizer within reach. The only solution may be a forced closure of the entire facility.
This happened a week ago in Windsor, where the FCA minivan plant stopped production of the Chrysler Pacifica for 24 hours after unionized workers walked out, concerned for their health after a co-worker self-quarantined.
In Europe, Renault, Peugeot, Ford and Volkswagen, among others, have shut down auto assembly plants for the foreseeable future. In Italy, non-essential businesses are ordered closed, and of course that includes car dealerships. We’ve not seen such a ripple of closures in North America yet, but it may well happen soon and it doesn’t bode well for either auto production or sales.
All businesses will say their decision to close will be made in the interest of public health and safety, but it will really come down to supply and demand. Both General Motors and Fiat Chrysler Automobiles said this month that their U.S. production has not been affected, and GM’s CEO Mary Barra said earlier in March that parts supplies are assured “quite far into this month” – an optimistic translation of that statement suggests only another week or so, however, compared to the usual one or two months.
Parts production is being restored slowly in Central China, but these production lines need their own suppliers; this does not happen overnight. “Even if we wanted to resume production, we can’t access the materials we need due to supply chain disruptions,” a spokesperson for a Japanese auto supply company with plants in four Central Chinese cities told Reuters. “On top of that, we’re facing staffing shortages at our plants.”
Ontario-based Magna International, the world’s third largest manufacturer of auto parts, said Sunday that production has resumed at most of its 54 plants in China, though not yet to full capacity. And parts maker Martinrea International Inc., also based in Ontario, said this month that shifting dependence to locally manufactured parts, even at potentially higher cost, could be a good thing.
“Longer term, I believe the coronavirus event coupled with the trade disputes we have seen may cause all of us to review our supply chains,” said Rob Wildeboer, executive chair of Martinrea, on a quarterly conference call with investors March 5.
“For example, I think this will add to a trend to local insourcing or restoring to North America, which frankly could be very good for us.”
In Mexico, however, a government minister admitted that some auto assembly plants have enough inventory only for this month. Unlike Barra, he thought this was a major concern.
“I’ve been in contact with some important companies,” Manuel Gonzalez told Reuters. He’s the economic development minister for Aguascalientes, one of a dozen Mexican states that produce cars, of which 80 per cent go to the United States and Canada. “If that supply is not normalized, we will probably see firms suspending production.”
Even if the supply is restored, however, the buyers may not be there. Last week, Morgan Stanley said in an investor note that it expects U.S. auto sales to drop by 9 per cent this year, compared to the 1-2 per cent it originally forecast. That’s a drop of a million new vehicles from its initial estimate of 16.5 million vehicles to be sold in 2020. It won’t be just new cars affected, either, thanks to what Morgan Stanley auto analyst Adam Jonas called the “demand shock” of COVID-19. “Lower consumer sentiment will mean consumers may put off the purchase of expensive consumer discretionary purchases such as a ~$35k new car,” wrote Jonas to justify his prediction.
Research company LMC Automotive is not quite so gloomy, saying that U.S. sales will probably only drop an additional 300,000 this year, but its current forecast for the world as a whole is still not optimistic, dropping about 4 per cent for all auto sales. After all, sales in China plummeted almost 80 per cent in February, where whole cities have been on lockdown.
“Forecasts for car markets are likely to be revised down as the public health crisis deepens - especially in Europe and North America,” says David Leggett, Automotive Editor for analytics company GlobalData.
“If the global vehicle market decline in 2020 is nearer 10 per cent, that will inevitably result in much lower earnings for automotive companies, many of whom are experiencing rising cost pressures formed by the necessity to invest in expensive technologies such as electrification. Indeed, the new stronger headwinds on the global car market come as they face the burden of much tighter regulatory hurdles on CO2, especially in Europe.”
There is one sign of hope, however. Gas prices are significantly down, now averaging 82 cents a litre in southern Ontario. With people avoiding the congestion of public transport, and perhaps less frugal with using their cars, maybe we’ll all rediscover the joy of driving. After all, what goes around, comes around.
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